MBA Semester-IV

Project and Sourcing

Management

Course Code: KMBN OM04

Module-I
Introduction to Sourcing
Sourcing refers to the process of finding and acquiring goods, services or resources for a particular purpose. In
the context of business, sourcing typically involves identifying suppliers who can provide the required goods or
services at the desired quality, price, and level of reliability.

Sourcing can encompass a wide range of activities, from research and supplier evaluation to negotiation and
procurement. The aim of sourcing is to obtain the best possible value for the organization while ensuring that
the selected suppliers meet the necessary quality and compliance standards.

Sourcing can be a complex and time-consuming process, particularly in industries where there are numerous
suppliers and a wide range of products or services to choose from. Effective sourcing requires a thorough
understanding of the market and the competitive landscape, as well as the ability to negotiate effectively with
suppliers and manage relationships over the long term.

Overall, sourcing is a critical part of the procurement process and is essential for ensuring that an organization
has the resources it needs to operate efficiently and effectively.
Sourcing Vs. Procurement
Sourcing and procurement are closely related terms that are often used interchangeably, but they
refer to different stages in the supply chain process.

Sourcing is the process of identifying, evaluating, and selecting suppliers who can provide the
goods, services or resources needed to meet an organization’s needs. This includes researching
potential suppliers, assessing their capabilities and reliability, and negotiating contracts and pricing.

Procurement, on the other hand, is the process of purchasing goods or services from selected
suppliers. This includes the actual purchasing of goods, managing the logistics of delivery and
payment, and ensuring compliance with contract terms and conditions.
Sourcing Activities
Sourcing activities can encompass a wide range of tasks, depending on the specific needs and
objectives of the organization. Some common sourcing activities include:

Supplier identification: This involves researching and identifying potential suppliers who can provide
the goods, services or resources that the organization needs. This may include searching online
directories, attending trade shows and industry events, and reaching out to industry contacts for
recommendations.

Supplier evaluation: Once potential suppliers have been identified, they need to be evaluated to
ensure that they meet the organization’s quality, cost, and delivery requirements. This may involve
conducting site visits, reviewing supplier performance metrics, and evaluating the supplier’s
financial stability and compliance record.
Negotiation: Once a supplier has been selected, the organization may need to negotiate terms and
pricing to ensure that they are getting the best possible value. This may involve developing a
negotiation strategy, preparing a request for proposal (RFP), and engaging in direct negotiations
with the supplier.

Contract management: Once a supplier has been chosen and a contract has been signed, the
organization needs to manage the ongoing relationship with the supplier to ensure that they are
meeting their obligations under the contract. This may involve monitoring supplier performance,
resolving disputes, and renegotiating contract terms as necessary.

Risk management: Sourcing activities also involve managing the risks associated with working with
suppliers. This may involve conducting due diligence on suppliers to ensure that they meet the
organization’s compliance and risk management standards, as well as developing contingency plans
in case of supply chain disruptions or other unforeseen events.

Overall, effective sourcing activities require a combination of strategic planning, relationship

management, and risk mitigation to ensure that the organization is able to obtain the goods,
services or resources it needs at the best possible value.
Purchasing Cycle
The purchasing cycle, also known as the procurement cycle, is the series of steps that an
organization follows when acquiring goods or services from a supplier. The purchasing cycle typically
includes the following stages:

Identify the need: The first step in the purchasing cycle is to identify the need for a particular
product or service. This may be initiated by a department within the organization or by an individual
employee.

Develop specifications: Once the need has been identified, the organization must develop detailed
specifications for the product or service being purchased. This includes defining the required
quantity, quality, delivery schedule, and other relevant specifications.

Identify potential suppliers: After the specifications have been developed, the organization must
identify potential suppliers who can provide the product or service. This may involve conducting
research, soliciting bids, or leveraging existing supplier relationships.

Request for proposal (RFP): Once potential suppliers have been identified, the organization may
issue a request for proposal (RFP), which is a formal document that outlines the organization’s
requirements and invites suppliers to submit proposals for meeting those requirements.
Evaluate proposals: After receiving proposals from potential suppliers, the organization must
evaluate them based on a range of factors, including price, quality, delivery schedule, and
compliance with specifications.

Negotiate contract terms: Once a supplier has been selected, the organization must negotiate
contract terms and pricing to ensure that they are getting the best possible value. This may involve
developing a negotiation strategy, preparing a contract, and engaging in direct negotiations with the
supplier.

Place the order: After the contract terms have been agreed upon, the organization issues a
purchase order to the supplier, outlining the specific products or services to be delivered, delivery
schedule, and payment terms.

Receive and inspect goods or services: After the supplier has delivered the products or services, the
organization must inspect them to ensure that they meet the required quality standards and
specifications.
Approve and process payment: Once the products or services have been received
and accepted, the organization processes payment to the supplier according to the
terms outlined in the contract.

Evaluate supplier performance: Finally, the organization should evaluate the

supplier’s performance to ensure that they are meeting their obligations under the
contract and identify areas for improvement.

The purchasing cycle is a critical part of an organization’s procurement process, and

effective management of this cycle can help to ensure that the organization is able
to obtain the goods and services it needs at the best possible value.
8 R’s of Purchasing

The 8 R’s of purchasing are a set of principles that guide effective purchasing practices. They are:

Right quality: Ensuring that the purchased products or services meet the required quality standards
and specifications.

Right quantity: Acquiring the appropriate quantity of products or services to meet the organization’s
needs, while minimizing waste and excess inventory.

Right time: Obtaining the products or services when they are needed, in order to support the
organization’s operations and minimize disruptions.

Right source: Selecting the appropriate supplier or vendor who can provide the required products
or services at the best possible value.

Right price: Negotiating the best possible price for the products or services, while maintaining
quality and other required specifications.
Right terms: Establishing favorable contract terms and conditions that protect the organization’s
interests and minimize risk.

Right place: Ensuring that the products or services are delivered to the right location, whether it’s a
physical location or a digital one.

Right relationship: Building and maintaining positive relationships with suppliers and vendors to
foster collaboration, improve communication, and drive innovation.

By following these principles, organizations can optimize their purchasing practices and ensure that
they are obtaining the goods and services they need at the best possible value, while minimizing
risk and maintaining high levels of quality and customer service.
Characteristics of a Purchasing Manager
A successful purchasing manager should possess a wide range of skills and qualities, including:

Strong negotiation skills: A purchasing manager should be able to negotiate effectively with
suppliers and vendors to obtain the best possible value for the organization.

Attention to detail: Paying close attention to details is essential in purchasing to ensure that
products or services meet quality standards and specifications, and that contract terms and pricing
are accurately recorded.

Analytical thinking: A purchasing manager must be able to analyze data and trends to make
informed purchasing decisions and develop effective purchasing strategies.

Strong communication skills: A purchasing manager must be able to communicate effectively with
both internal stakeholders and external suppliers and vendors.
Strategic thinking: A purchasing manager should be able to develop long-term purchasing
strategies that align with the organization’s overall goals and objectives.

Financial acumen: A purchasing manager must have a strong understanding of financial concepts
such as budgeting, forecasting, and cost analysis.

Relationship management: Building and maintaining positive relationships with suppliers and
vendors is critical in purchasing, and a purchasing manager should have strong relationship
management skills.

Flexibility: A purchasing manager should be able to adapt to changing business needs and market
conditions to ensure that the organization’s purchasing practices remain effective and efficient.

Problem-solving skills: A purchasing manager should be able to identify and solve problems
related to purchasing, such as supply chain disruptions or quality issues.

Leadership skills: A purchasing manager should be able to lead and motivate a team of
purchasing professionals to achieve common goals and objectives.
Risks to Considered by Purchasing Management
Purchasing management involves various risks that must be considered and managed effectively to
ensure that the organization’s purchasing practices are effective, efficient, and in line with its overall
goals and objectives. Some of the key risks that purchasing managers need to consider include:

Supply chain risks: These risks include disruptions to the supply chain, such as natural disasters,
political instability, and economic downturns, which can impact the availability and cost of goods
and services.

Quality risks: These risks include issues related to product quality, which can impact the
organization’s reputation and customer satisfaction. Purchasing managers must ensure that
products or services meet quality standards and specifications.

Contract risks: These risks include issues related to contract terms and conditions, such as pricing,
delivery schedules, and warranties. Purchasing managers must negotiate favorable contract terms
and conditions that protect the organization’s interests.
Legal risks: These risks include compliance with laws and regulations related to purchasing, such as
antitrust laws, intellectual property laws, and labor laws. Purchasing managers must ensure that the
organization’s purchasing practices are in compliance with applicable laws and regulations.

Financial risks: These risks include issues related to the cost of goods and services, such as inflation,
currency fluctuations, and interest rates. Purchasing managers must manage financial risks to
ensure that the organization is obtaining goods and services at the best possible value.

Reputation risks: These risks include issues related to supplier and vendor relationships, such as
ethical concerns or reputational risks associated with working with certain suppliers or vendors.
Purchasing managers must manage these risks to protect the organization’s reputation.

Cybersecurity risks: These risks include issues related to the security of digital systems and data,
which can impact the confidentiality, integrity, and availability of information related to purchasing.
Purchasing managers must ensure that the organization’s digital systems and data are secure and
protected from cyber threats.

By effectively managing these risks, purchasing managers can ensure that the organization’s
purchasing practices are effective, efficient, and in line with its overall goals and objectives.
Make or Buy Decision: An Introduction

Make or buy decision is a strategic choice that organizations face when deciding whether to
produce a product or service in-house (make) or purchase it from an external supplier (buy). The
decision to make or buy can have significant implications for an organization’s operations, finances,
and overall performance.

When making the decision, organizations need to consider various factors such as:

Cost: The cost of producing a product or service in-house versus purchasing it from an external
supplier is a key consideration. In-house production may involve higher fixed costs, such as
equipment and labor, while purchasing from a supplier may involve higher variable costs, such as
shipping and handling.

Capacity: An organization’s production capacity may influence the decision to make or buy. If an
organization has excess capacity, it may be more cost-effective to produce in-house. On the other
hand, if capacity is limited, it may be more efficient to purchase from a supplier.

Control: The level of control an organization wants over the production process may also influence
the decision. Producing in-house allows for greater control over the production process, quality, and
delivery, while purchasing from a supplier may involve relinquishing some control.
Expertise: An organization’s expertise in producing a particular product or service may also
influence the decision. If an organization has a high level of expertise, it may be more cost-effective
to produce in-house. If not, it may be more efficient to purchase from a supplier with specialized
expertise.

Risk: Risk is also a factor in the make or buy decision. Producing in-house may involve greater risk in
terms of investment in equipment and labor, while purchasing from a supplier may involve greater
risk in terms of quality, delivery, and supplier reliability.

Ultimately, the decision to make or buy requires a careful analysis of the costs, benefits, and risks
associated with each option. By making an informed decision, organizations can ensure that they
are maximizing their resources and achieving their strategic goals.